Disruption is Weighing on Markets

Disruption is Weighing on Markets

Monthly Outlook: July 2018 

For most of this year, we’ve seen global stock markets moving sideways but trending higher.  That is, prices remained above their 200-day moving averages.  That changed in June.  Although the headline market – the S&P500 – remains up-trending for now, many markets just “tipped” to downtrends.  Of course, that means we’ve trimmed our positions in those markets and moved to protection mode.  For the first time in years, you’ll notice that we’re holding some cash and have become a bit more conservative in our allocation mix.  Now is not the time to just sit there with a buy & hold allocation and hope for the best.  Things have changed.

Let’s review the broad markets before we delve into the specifics.  U.S. stocks (S&P500) managed a small gain of 0.5% in June and are up 2.5%, YTD. The S&P500 remains stuck at 2,700, give or take 100 points for the past seven months and is at 2,718 as we start the 2nd half of the year.  It is only 1.8% above it’s rising trendline so it needs to hold here.  International stocks (FTSE All-world ex-USA) stumbled in June, falling 2.1%.  Europe was down 1.2%, Asia was down 2.6%, and Emerging Markets tumbled another 4.7%.  Most importantly, the long-term trends of all international markets are now clearly down and so we’re under-allocated these markets in an effort to protect from loss.  Lastly, bonds held steady with a loss of -0.04%.  Overall, bonds remain in a small downtrend due to gradually rising rates.  Accordingly, we remain over-weighted in short-term, investment-grade bond funds.

Looking Deeper into Markets

Investors often talk about “the market” as if it was really one big asset class that moves higher and lower, in sync at all times.  Of course, that’s not really the case.  Usually, “the market” is short-hand for stocks, and U.S stocks, specifically.  But it’s useful to look deeper into the indices to see what’s driving returns, what’s working, and what’s not.  Our iFolios strategy classifies every holding as up-trending or down-trending.  It’s a factual observation of what’s actually happening and we base our allocation decisions on these trends with no guessing required.  Today, for the first time in over two years, we have divergences in some asset classes that allow us to add some real value by over and under-weighting each holding.  Let’s look at the specifics:

Global stocks:  U.S. stocks (52% of the world) are up; international stocks (48% of the world) are down.  U.S. stock sectors:  Technology, Energy, and Consumer Cyclicals are up; Financials, Industrials, Consumer Staples and Materials are down.  U.S. stocks styles:  Growth is up; Value is down.

The market is dividing into uptrends and downtrends, winners and losers, as investors sort out the effects of various policies being crafted around the world.

Disruption and Markets

It’s not hard to notice that the over-riding political, economic, and social theme around the world today is “disruption.”  We see it in the U.S., U.K., Europe, Russia, China, and everywhere, really.  Remember, disruption is not necessarily good or bad; it’s just significant change.  And investors in global markets really don’t like disruption, change, and uncertainty.  How will a new regulatory policy affect the desire to expand into new markets?  How will an immigration policy change affect labor, both supply and price?  How would a nuclear weapons build-up affect peace and stability in a region?  How will the U.K. leaving the E.U. affect cross-European trade, currency rates, and social peace?  How will U.S. tax reform affect wealth inequality but also the creation of jobs?  Will tariffs and counter-tariffs level the playing field or will it shrink the global pie?

Clearly, there are more questions than answers and that is the point.  We may be moving through a multi-year period of global disruption and uncertainty, with ever-changing outlooks and outcomes.  Incalculable hours will be spent trying to sort it all out.  Fortunately for us, “the market” represents the sum total of all analysis at any one time.  By following the trends of each market, we’ll know with certainty how to invest.  We can embrace disruption with calm and confidence.